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Cross‐Asset Speculation in Stock Markets

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  • DAN BERNHARDT
  • BART TAUB

Abstract

In practice, heterogeneously informed speculators combine private information about multiple stocks with information in prices, taking into account how their trades influence the inferences of other speculators via prices. We show how this speculation causes prices to be more correlated than asset fundamentals, raising price volatility. The covariance structure of asset fundamentals drives that of prices, while the covariance structure of liquidity trade drives that of order flows. We characterize how speculator profits vary with the distributions of information and liquidity trade across assets and speculators, and relate the cross‐asset factor structure of order flows to that of returns.

Suggested Citation

  • Dan Bernhardt & Bart Taub, 2008. "Cross‐Asset Speculation in Stock Markets," Journal of Finance, American Finance Association, vol. 63(5), pages 2385-2427, October.
    • Handle: RePEc:bla:jfinan:v:63:y:2008:i:5:p:2385-2427
    DOI: 10.1111/j.1540-6261.2008.01400.x
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    Cited by:

    1. Paolo Pasquariello & Clara Vega, 2015. "Strategic Cross-Trading in the U.S. Stock Market," Review of Finance, European Finance Association, vol. 19(1), pages 229-282.
    2. Danilova, Albina & Julliard, Christian, 2014. "Information asymmetries, volatility, liquidity, and the Tobin Tax," LSE Research Online Documents on Economics 60957, London School of Economics and Political Science, LSE Library.
    3. Tan, Fei & Walker, Todd B., 2015. "Solving generalized multivariate linear rational expectations models," Journal of Economic Dynamics and Control, Elsevier, vol. 60(C), pages 95-111.
    4. Gerig, Austin & Michayluk, David, 2017. "Automated liquidity provision," Pacific-Basin Finance Journal, Elsevier, vol. 45(C), pages 1-13.
    5. Yi Li & Ju’e Guo & Kin Keung Lai & Jinzhao Shi, 2022. "Optimal portfolio liquidation with cross-price impacts on trading," Operational Research, Springer, vol. 22(2), pages 1083-1102, April.
    6. Ames, Matthew & Bagnarosa, Guillaume & Peters, Gareth W., 2017. "Violations of uncovered interest rate parity and international exchange rate dependences," Journal of International Money and Finance, Elsevier, vol. 73(PA), pages 162-187.
    7. Sastry, Ravi & Thompson, Rex, 2019. "Strategic trading with risk aversion and information flow," Journal of Financial Markets, Elsevier, vol. 44(C), pages 1-16.
    8. Dimpfl, Thomas & Flad, Michael & Jung, Robert C., 2017. "Price discovery in agricultural commodity markets in the presence of futures speculation," Journal of Commodity Markets, Elsevier, vol. 5(C), pages 50-62.
    9. Yutong Lu & Gesine Reinert & Mihai Cucuringu, 2023. "Co-trading networks for modeling dynamic interdependency structures and estimating high-dimensional covariances in US equity markets," Papers 2302.09382, arXiv.org, revised May 2024.
    10. Luca, Giovanni De & Guégan, Dominique & Rivieccio, Giorgia, 2019. "Assessing tail risk for nonlinear dependence of MSCI sector indices: A copula three-stage approach," Finance Research Letters, Elsevier, vol. 30(C), pages 327-333.
    11. Bart Taub, 2018. "Inconspicuousness and obfuscation: how large shareholders dynamically manipulate output and information for trading purposes," Annals of Finance, Springer, vol. 14(4), pages 429-464, November.

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